Feb 2023 Charity & NFP Law Update
In Canada Revenue Agency (“CRA”) document 2022-0940951C6-T, from the October 7, 2022 Taxation of Financial Strategies and Instruments Roundtable, the CRA gave insight into its position of gifts of capital interest in a charitable remainder trust (“CRT”) created by a will of an individual who died after 2015.
By way of background, the tax rules for estate gifts and testamentary trusts of individuals were changed in 2016 and the graduated rate estate (“GRE”) was created. In order to qualify as a GRE, the estate must be a testamentary trust resident in Canada, it must designate itself as such on the T3 return of its first taxation year and there must be no other GRE for that testator. The GRE will last no more than 36 months after the person’s death.
The CRA considered three questions: (1) whether a testamentary gift of an interest in a CRT from an individual who died after 2015 is eligible for a donation tax credit; (2) whether the capital interest in the CRT was acquired by the GRE on and as a consequence of the death of the individual; and; (3) when the GRE makes the gift.
In response to questions (1) and (2), the CRA indicated that the individual who died after 2015 could not claim the tax credit for gifts with respect to the gift to a qualified donee of a capital interest in a CRT created by will; and that the capital interest in the CRT was not acquired by the GRE on and as a consequence of the death of the individual. This is because the subject of the gift is the equitable interest in the CRT, which has not been acquired by the GRE on and as a consequence of the death of the deceased taxpayer as required under paragraph 118.1(5.1)(b) of the Income Tax Act. The interest is not a property substituted for such property.
Clause 118.1(1)(c)(i)(C) of the Income Tax Act provides that, in the case of a gift from an individual’s estate, the tax credit for the gift can only be claimed by the deceased person if subsection 118.1(5.1) Income Tax Act applies to the gift. Subsection 118.1(5.1) applies to a gift made by the GRE of an individual whose death occurs after 2015, provided that the gift is made within 60 months after the death, including where the subject matter of the gift is donated property that was acquired by the estate at the time of, and as a consequence of, the individual’s death, or property that was substituted for the donated property.
In the case of a gift of a capital interest in a CRT, the subject matter of the gift is the capital interest in the CRT and not the property transferred to the CRT by the GRE. This capital interest in the CRT cannot have been acquired by the GRE at or as a consequence of the individual’s death or be a substituted property for a property so acquired by the GRE. Therefore, subsection 118.1(5.1) does not apply to such a gift and the requirement in clause 118.1(1)(c)(i)(C) is not met. Thus, it is not possible to add the amount of such a gift in calculating the deceased individual’s total charitable gifts, either for the taxation year of death or for the preceding taxation year.
A capital interest in a CRT under a will is created subsequent to the person’s death, after the GRE acquires the deceased’s property as a result of his or her death. The CRT acquires property from the GRE, while the gift to the qualified donee is a capital interest in the CRT. The capital interest in the CRT is not property acquired by the GRE, nor is it property substituted for one or more properties acquired by the GRE.
In response to questions (3) the CRA indicated that the GRE could be considered to have made a gift of the capital interest in the CRT to the qualified donee at the time when the CRT is created by the GRE and the capital interest vests in the qualified donee, provided that all of the conditions set out in paragraph 2 of Interpretation Bulletin IT-226R (Gift to a Charity of a Residual Interest in Real Property or an Equitable Interest in a Trust) are met.